In Legalizing Marijuana, Uruguay Trips over the Dollar, US Laws, and Global Banks

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by Don Quijones, Wolf Street:

Why Drug Lords Love the Patriot Act.

It’s far from easy to do business without the financial support of any bank. But Uruguay, in its efforts to create a legal, regulated market for the recreational use of marijuana, is trying. In August it was revealed that some of the pharmacies that had agreed to sell the two varieties of cannabis distributed by the Uruguayan State had received threats from their respective banks, including the local subsidiary of Spain’s Santander, that they would close their accounts unless they stopped participating in the state-controlled sales.

To fill the funding void, the state-owned lender Banco República (BROU) announced that it would provide credit to the pharmacies involved in the scheme as well as producers and clubs. But within days, it too was given a stark ultimatum, this time from two of Wall Street’s biggest hitters, Bank of America and Citi: Either it stopped providing financing for Uruguay’s licensed marijuana producers and vendors or it’s dollar operations could be at risk — a very serious threat in a country where US dollars are used so widely that they can even be withdrawn from ATMs.

Why Drug Lords Love the Patriot Act

The main reason why this is all happening is that under the US Patriot Act, handling money from marijuana is illegal and violates measures to control money laundering and terrorist acts. Despite the fact that US regulators have made it clear that banks will not be prosecuted for providing services to businesses that are lawfully selling cannabis in states where pot has been legalized for recreational use, major banks have shied away from the expanding industry, deciding that the burdens and risks of doing business with marijuana sellers, both within and beyond U.S. borders, are not worth the bother.

The perverse irony, as the NY Times pointed out, is that applying US regulations intended to crack down on banks laundering the proceeds from the illegal sale of drugs to the current context in Uruguay is likely to encourage, not prevent, illicit drug sales.

So far, only 12 of Uruguay’s 1,100 pharmacies have signed up to supply the 17,391 government-registered marijuana consumers, which explains the long, winding queues that often form outside the dispensaries that sell the government-approved product.

Given the payment restrictions imposed by the banks, the pharmacies have little choice but to conduct all transactions in cash. The government also has plans to allow businesses to set up shop just for the sale of marijuana. One “advantage” of these new establishments, many of which will be small kiosks, is that they will know from the get-go that they will not be able to have a bank account in the company’s name, said Diego Olivera, general secretary of Uruguay’s National Drugs Board. They will also be purely cash-based businesses — at least until the banks abandon their boycott of legal marijuana businesses, assuming they ever do.

Customer Complaints

When the government launched the scheme in July, many consumers were dissatisfied with the potency of the government-licensed marijuana. “The government made a mistake because the first batch they released to the market in July had a potency level of only 2% THC,” says Eduardo Blasina, president of Montevideo’s cannabis museum.

But the government was quick to change tack. “(It) got the message and has now upped the content to 9% THC,” says one Montevideo pharmacist. A consumer himself, he adds: “I’ve tried it and I can assure you that it provides a most satisfactory experience.”

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